Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Dominik Sachs, Aleh Tsyvinski and Nicolas Werquin

No 6089, CESifo Working Paper Series from CESifo

Abstract: We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code.

Keywords: nonlinear tax policy; tax incidence; optimal taxation; general equilibrium (search for similar items in EconPapers)
JEL-codes: H20 H21 H22 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Journal Article: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2020)
Working Paper: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2020)
Working Paper: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2019)
Working Paper: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2016)
Working Paper: Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6089

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